Korea’s Samsung Faces a Revolution Over Resignation, Scandal

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Although a special prosecutor cleared Korea’s largest chaebol and its chairman of bribery and slush fund allegations, the uncertainties and worries for the Samsung Group will continue after its chairman’s abrupt resignation Tuesday, five days after being indicted on lesser tax evasion and breach of trust charges.

Chairman Lee Kun-Hee, the son of the massive company’s founder, made the announcement at a press conference called to announce internal reforms following the worst scandal in the company’s history. “Today, I have decided to step down from the Samsung group chairmanship," Lee said. “I express my deepest apologies for causing great concern to the public as a result of the special probe.”

Lee’s departure will leave the group in the hands of professional managers, a revolutionary turn of events for a chaebol, the traditionally family-run firms that still dominate the Korean economy.

Vice Chairman Lee Hak Soo and President Kim In Joo are also to resign by the end of June, the company said in a statement today. A controversial strategic planning office that has been blamed by observers for devious strategies designed to keep Chairman Lee’s family in control of the group will be dismantled. Samsung may transform itself into a holding company structure, the statement said. A spokesman added that “enormous changes” would occur at the group. “Samsung will be reborn as a global world-class entity,” the spokesman said.

The chairman's son and heir apparent, Lee Jae Yong, will also be transferred overseas, the company said, ending speculation that he would assume the chairmanship should his father step aside.

The wording of Lee’s statement — an apology for troubling the Korean people — fits an almost pro-forma script used by senior corporate officials in the country when they are tarred by frequent scandals. But his sudden resignation — and the stepping aside of his son — goes beyond what most would have expected and underscore the seriousness of the charges facing the company.

The indictments for tax evasion and other lesser charges filed against the Chairman Lee and nine senior executives are widely seen as having stopped short of tackling the most serious allegations made by the corporate insider and whistleblower who kicked off the latest round of probes into Samsung’s operations.

As a result, the company faces a continued crusade by the its former legal affairs chief, Kim Yong-cheol, to bring the chaebol to justice on allegations that it maintained a massive slush fund to pay off politicians, judges, journalists, civic groups and scholars and, so Kim claims, just about anybody else it needed to bribe. Kim and two civic groups – the Solidarity for Economic Reform and The People’s Solidarity for Participatory Democracy – said they will file appeals to the nation’s prosecution to reinvestigate.

The giant conglomerate also faces the continued animosity of the Catholic Priests Association for Justice, a 30-year-old association of priests that played a unique role in the drive for democracy in the 1980s and continues to serve as the nation’s conscience; Kim brought his allegations to the clerics last October before going public with them.

The resignations may be a way for the giant firm to mute public criticism and avoid further scrutiny. In a country where conglomerates and their top officers have often been accused of massive corruption, Korean prosecutors have historically backed away from serious punishment, preferring to let big corporate fish off the hook in exchange for hefty donations to charitable causes or other face-saving devices.

Indeed, the 10 businessmen, including Chairman Lee, found to be involved in illegal activities in the current case were deemed by prosecutors “too important to be jailed” because of their roles in operating Samsung, which accounts for about 20 percent of Korea’s economy. The possible impact on the nation’s economy was said to be too critical if there was a Samsung management vacuum. The company seems to have decided otherwise, setting a precedent that could also affect other giant firms whose leaders have often been seen to be irreplaceable.

Lee's departure signals ``an end to the era of the Masters of the Universe,'' said Tom Coyner, a consultant to foreign investors in Korea, according to Bloomberg. “The resignation by Chairman Lee Kun Hee is unprecedented.”

In the end, it appears that the whistleblower has had an enormous impact, far beyond what many expected when the scandal began. “I have realized that this is a matter worth fighting for during the rest of my life,” former legal counsel Kim said a day after the independent counsel cleared Lee of the bribery allegations after a 99-day probe. “If the investigators managed to get to the bottom of Samsung corruptions easily, I would have been dumbfounded.”

The allegations that Korea’s largest business group had committed a spectacular series of wrongdoings broke in October when Kim, who headed Samsung’s legal affairs team from 1997 to 2004, accused Chairman Lee of committing breach of trust to shareholders by employing illegal means to hand over to his children – principally his son — the corporate ownership of the group. He also alleged that the company maintained a massive network of slush funds used to bribe prosecutors, politicians, judges and journalists.

No pre-trial detention

A brief initial investigation into the allegations was conducted by the nation’s prosecutors, `but the case was handed over to Independent Counsel Cho Joon-woong. Because Kim claimed that top prosecutors had been on Samsung’s bribery tab, the National Assembly appointed the special prosecutor to conduct a possibly influence-free investigation.

Cho announced the outcome of his probe on April 17. During the investigation period, 100 former and current Samsung officials, including Chairman Lee, were embarrassed by being publicly summoned for questioning and investigators raided Lee’s residence and private office, Samsung headquarters, senior executives’ offices and electronic data management centers of the conglomerate.

In a much-publicized search for the Lee family’s private art collection that Kim claimed to have been created with slush funds, investigators also raided the Samsung Foundation of Culture’s warehouses.

The independent counsel indicted Lee for seeking to evade US$114 million in taxes and breach of trust, but cleared him of the more potent slush funds and bribery allegations. Nine other Samsung top officials including the second highest officer in the conglomerate, Lee Hak-soo, were also indicted on charges ranging from breach of trust and tax evasion to embezzlement and destruction of evidence.

None of the indicted, however, will be detained for trial. In a country where pre-trial detention is often used to browbeat accused criminals into confessing, Cho provided a lengthy explanation for not detaining Lee and others before trial during his press conference.

“The crimes that the 10 suspects were indicted on involved an astronomical amount of money, and the court’s punishments are expected to be heavy,” Cho said. “However, this case is about applying the strict legal standard of today to business practices of the past. It is different from a typical breach of trust and tax evasion committed out of an individual’s greed.” Cho added that the 10 suspects were not flight risks.

According to Cho, the investigation revealed that Lee had about 4.5 trillion won (US$4.5 billion) in assets hidden under other Samsung executives’ names. Executives who had managed Lee’s hidden wealth allegedly evaded 112.8 billion won in capital gains tax on profits of 564.3 billion won through trading Samsung affiliates’ shares, Cho said.

The probe also alleged that Lee and his subordinates had committed breach of trust involving two Samsung affiliates – Everland and Samsung SDS. They were indicted for allegedly ordering the companies to sell convertible bonds and bonds with warrants, respectively, to Lee’s children at below-market prices. Everland, a theme park operator, is Samsung Group’s de-facto holding company, and the trades provided opportunities for Lee’s children to gain control of the business group.

The independent counsel, however, said his team failed to find evidence to file indictments on the alleged slush funds. As the probe progressed, investigators came to have suspicions that Samsung had employed systematic efforts to manage its web of personnel connections with the nation’s power players, Cho said, but the team did not have enough evidence to press charges against the alleged bribery.

“Samsung officials and prosecutors accused of bribery both denied the charges, and the investigators found no evidence to support the allegation,” Cho said. While the independent counsel has nothing more than Kim’s accusations to prove the case, the whistleblower’s testimony was also incomplete and inconsistent, Cho said.

Kim reacted with outrage

“This independent counsel probe was nothing more than spending the state budget to locate Lee’s hidden assets and launder the sum and return them to him,” the former legal counsel told reporters after the indictments.

It remains to be seen if that argument turns out to be true. The independent counsel probe confirmed that Lee indeed had 4.5 trillion won of hidden assets he inherited from his father, Samsung founder Lee Byung-chul, but there appears to be no legal ground to collect the overdue inheritance or gift taxes on the sum. Lee Byung-chul died in 1987 and the 15-year period during which tax authorities can levy taxes on the money has long passed.

Under Korea’s tax laws, the National Tax Service has only one additional year to collect overdue taxes after a tax evasion charge is revealed.

“The investigators were mandated to investigate Samsung, but they investigated me instead,” Kim said. He complained, for example, that the special prosecutor skirted investigating whether Samsung secretly continued to own the JoongAng Ilbo, one of Korea’s leading newspapers, despite a 1999 agreement to give up ownership of the Samsung-founded paper. The chairman of the newspaper group and Chairman Lee of Samsung are married to sisters.

“The special prosecutor’s law on the Samsung case did not give them the authority to probe the JoongAng Ilbo’s disguised separation from the Samsung Group, but they concluded the case,” Kim complained.

The independent counsel’s report said that there was no evidence to prove Kim’s claim that the daily newspaper’s separation from Samsung was a ruse, and that Lee continues to own the paper under a secret agreement.

As for the indictments against Lee for tax evasion and breach of trust filed by the special prosecutor, the Seoul Central District Court will conduct the trials. Under the special law that mandated the independent counsel probe, the court has three months to rule on the case.

It is not the first time Samsung Chairman Lee has been in the dock. In 1995, he, along with other Korean conglomerates’ heads, received a suspended sentence after being convicted of giving illegal political donations to former President Roh Tae-woo. The Kim Young-sam administration pardoned Lee in 1997.

After the independent counsel’s announcement on the probe outcome, Samsung promised reform. The business group said it would announce its earnings and the management restructuring plan this week.

Civic groups are spilt about where the scandal stands now. While liberal civic groups such as the Lawyers for Democratic Society and the Catholic Priests Association for Justice expressed their disappointment at the independent counsel’s conclusion, conservative civic groups such as the Liberty Union said they were relieved to see that the probe was ended.

Korea’s public also showed mixed reactions. “I was so frustrated with the conclusion that the special prosecutor reached,” said Brian Kwon, a 34-year-old business consultant in Seoul. “I always wondered if the special prosecutor had any willingness to actually get to the bottom of this scandal. Chairman Lee was indicted, but he was only questioned twice during the probe. Who would think the investigation was through?”

Others say they think otherwise. “I don’t care if Samsung was involved in corruption or not. I wonder if anybody is completely free from corruption and influence,” said Lee Ju-won, a 58-year-old real estate developer. “I’ve seen worse, and I think for what Samsung had done for our economy, it’s okay to leave them alone.”

By publicly falling on his sword, Chairman Lee seems to hope that his sacrifice will benefit a company that grew out of a small trading firm founded by his father in 1938 and perhaps win back public trust.

“Dear Samsung family, I promised 20 years ago that all the glory would go to you when Samsung is recognized as a really first-class business,” Lee said in announcing his resignation. “I am really sorry not to keep the promise.”

He asked the Korean public to “keep supporting Samsung to (help it) grow into a first-class world business.”